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Kickstarter – a source of funds and a big tax bill?

Kickstarter is a crowdfunding platform for creative projects. Project creators set a funding goal and deadline for their project. If people like the project, they can pledge money to help make it happen. Kickstarter has become a popular platform for designers to raise funds while using “reward” selections to market test their garments or accessories. From the newest in fashion to movies and gadgets, and, yes, even potato salad, a wide range of products and ideas find their way to Kickstarter.

While Kickstarter has been a great fundraising platform for a wide range of people who may have had no alternative source of financing, an issue that many people overlook is the tax implications from a successful Kickstarter campaign.

ARE PLEDGES INCOME OR GIFTS?

The tax implications are largely driven by the question of whether pledges are to be treated as income or gifts to the recipient? The IRS has not provided any guidance, and there has not been any litigation on the issue that we are aware of. Kickstarter has published a Tax Guide, but in some ways it raises more questions than it answers. Kickstarter states that, in general, "funds raised on Kickstarter are considered income." However, the guide goes on to say that recipients may be able to classify funds as "nontaxable gifts," but doesn't provide any clarity regarding when that may be the case.

TAXABLE INCOME

As Kickstarter's Tax Guide states, and as is the consensus of tax and accounting professionals that have opined on the topic, funds received via Kickstarter are likely to be treated as taxable income. If funds are income, recipients are obligated to report them as such to the IRS, although taxes owed can be offset with business expenses.

GIFTS

If funds are treated as a gift, then they would not be taxable to the recipient, but could be to the gift giver if over the threshold for a non-taxable gift (currently $14,000). Recipients should be cautious though, as it's likely that in only the most clear-cut cases will the IRS consider funds received to be gifts. And even in seemingly clear-cut cases, there still can be issues.

As reported by NBC News, novelist Neil Gaiman raised nearly $50,000 on another crowdfunding platform, www.youfunding.com, to pay for experimental cancer treatment. Gaiman was advised by an accountant that he should not expect the funds raised for his treatment to be reported to the IRS. However, he received a 1099-K form from PayPal, which processes payments for Youcaring.com campaigns that listed the gifts as income. Whether the IRS will ultimately treat the funds as a gift or income is unknown, but, justified or not, failing to pay taxes on funds reported as income on a 1099 is a good way to trigger an audit.

SALES TAX

One final issue to consider is sales tax. Many Kickstarter campaigns offer rewards to contributors. These rewards, which for a fashion designer is often a garment or accessory that they are or will otherwise offer for sale, may be subject to sales tax. The designer, and many other project creators, will likely be responsible for collecting and sending sales tax funds for intrastate transactions to the appropriate taxing authority, while interstate and foreign sales would not be subject to sales tax.

SOME BEST PRACTICES

If you're planning a Kickstarter campaign, here are a few things to keep in mind:

Talk to an Accountant Before Your Campaign: Absent some extraordinary circumstances, the proceeds from your campaign will be considered income. Before beginning your campaign, consult with a business accountant who can help you plan how to legally defer or avoid a heavy tax burden.

Budget for Taxes: You need to understand and be prepared for the fact that funds you receive will be treated as income for tax purposes. Therefore, make sure to set aside an appropriate amount for taxes, and if you are an individual or own a pass through entity such as an LLC or partnership, make sure to take these funds into account when making quarterly withholding payments.

Sales Tax: Remember that you may need to collect and pay sales tax related to intrastate transactions, so make sure your paperwork and records are in order, and that you register to pay sales tax with your state.

Business Expenses: While Kickstarter funds may be income and therefore taxable, valid business expenses can be used to offset taxes. If a business is on a calendar year for tax purposes, it may want to conduct its Kickstarter campaign earlier in the year so that it has time to offset income in the same tax year.

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